February 25, 2012 Guidance

Risk/Reward Vol. 107

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"Many times by the highway side, I tried to flag a ride/With bloodshot eyes and gritting teeth, I'd watch the cars roll by
In the empty air, my only guide, I traveled on alone/Been a long time comin' and I'll be a long time gone"---lyrics "Long Time Gone" by Bob Dylan

"Is it any wonder, heaven's racked with thunder/And all my dreams go under like fallin' rain
Execution Day"---lyrics "Execution Day" by Meat Loaf

"My mom, she gave me a nickel/She told me to buy a pickle
But, I didn't buy no pickle/I bought some bubble gum
Bazooka, zooka Bubble Gum"---lyrics "Bazooka Bubble Gum Song" by Bazooka Joe

"Tall and tan and young and lovely/The girl from Impanema goes walking
And when she passes, each one she passes goes--Ah"---lyrics "Girl from Ipanema" sung by (among others) Andy Williams

Every three months (or "quarterly" in stock market parlance), corporations with shares that trade on United States' stock markets are required to report their earnings. These reports are usually accompanied by conference calls held between the CEO's of the reporting companies (and perhaps other senior managment) and investment professionals wherein the executives discuss financial results and future plans in detail and wherein they give "guidance" on what they believe will happen in the future. Transcipts of these conference calls are readily available, (www.seekingalpha.com ), and each evening during earnings season, I peruse that day's transcipts, paying particular attention to comments relating to stocks I own. The exercise is not taxing; my eyes are not "bloodshot" nor are my "teeth gritting" from the effort. I recommend you try it. It provides a wonderful break from CSI, The Voice, American Idol, American Pickers or whatever other drivel you endure. As a yield hunter, I vigilantly look for comments impacting future dividend payments. To me, good managers are those that deliver what they "guide". Some execute, and unfortunately, some only deliver "empty air".

Allow me to illustrate. As my long time Readers know, I like telecom companies, especially those in the legacy land line segment, such as CenturyLink (CTL), Windstream (WIN) and until recently Frontier (FTR). Like tobacco companies, land line telecoms operate in a stable, slowly declining industry, characterized by low capital expenditures, steady cash flow and outsized dividends. During conference calls held last fall, the CEO's of CTL, WIN and FTR each reported acceptable financial performance and "guided" that their respective dividends were safe. Frontier's CEO went so far as to state: "We expect improvement in our dividend payout ratio" and then affirmed FTR's $0.75 per share dividend. In the weeks following that conference call, market commentators speculated vociferously that FTR's dividend would be cut, and the stock plummeted. Despite numerous opportunities to address the speculation about a dividend cut, Frontier's management remained silent, leaving this investor with the impression that the previous quarter's guidance ("improvement in our dividend payout ratio") was still accurate. At the February 16, 2012 quarterly conference call, FTR's CEO announced a reduction in the dividend--contrary to her previous guidance. My reaction was not a "long time comin'", I "executed" a sell order the next day---"is it any wonder?" Oh, and by the way, both CTL and WIN delivered on their previous guidance, and gave positive guidance for the future. This past week I added another WIN position.

Keep your eyes on Europe next Wednesday (Feb. 29), as the European Central Bank (ECB) launches phase two of its Long Term Refinancing Operation (LRTO), otherwise known as the Backdoor Bazooka (see Risk/Reward Vol. 98 at www.riskrewardblog.blogspot.com ). This is a continuation of the ECB's program to make three year, low interest rate loans available to Eurozone banks to insure their liquidity and to entice them to continue purchasing sovereign debt--in particular that of Spain and Italy. The LTRO (which at year end 2011 infused 489Billion Euros into Eurozone bank coffers) has been hailed as the single most significant factor in stabilizing the European debt "pickle". Let's hope phase 2 provides enough bubble gum to plug the dyke holding back the flood of Eurozone sovereign debt, and that the Eurozone continues to stabilize.

If Europe remains stable, if the Iranian situation does not boil over and if oil prices do not escalate much more, the economies of the world may actually experience some growth this year. Traditionally, an early indicator of economic growth is an uptick in the cost of commodities--particularly copper. Noting that many commodities are in backwardation (future prices are lower than current prices), Goldman Sachs this week recommended that its clients "overweight" (buy) commodities. There are many ways to achieve exposure to commodities. I like two closed end funds: CFD (which purchases commodities futures) and BCF (which invests in mining and mineral companies). One long time reader has gained exposure to commodites by investing in Brazilian companies that trade on the NYSE. There are more than 40 including Vale, CPL, ABV, EBR, etc. He reasons that since Brazil's economy is highly dependent on commodities, Brazilian stocks should do well generally when commodity prices rise. So far he has been right. Indeed, he has profited so much recently that he is contemplating a trip to Rio so he, too, can be ignored by the beautiful women of Ipanema. I likewise believe that emerging market investment provides exposure to commodities, so I own shares in the closed end fund INH, to which I added this week.

Twenty or so of the thirty seven trading days this year have ended to the upside. And as all Meat Loaf fans know, this is good

"'Cause two outta three ain't bad."